Excerpt:direct taxation - jurisdiction - sections 45, 54 and 154 of income tax act, 1961 and section 12 b of income tax act, 1922 - whether income-tax officer had jurisdiction to invoke provisions of section 154 and revise assessment originally made - income-tax officer had no jurisdiction to invoke provisions of section 154 when issue involved was debatable one and on which there may be two opinions.
- - ' 5. the words 'new asset' occurring in section 54(i) as well as in section 54(ii), in the latter in more than one place, must refer to the asset which is indicated in section 54, paragraph 1. this can only be an asset that had been acquired within a period of one year before or after the date of sale or constructed within two years thereof. (i). we decline to answer this question as well......attracted to the sale effected by the assessee on july 1, 1962 ? (iii) whether the computation of capital gains assessable to tax is in accordance with law ' 2. the year of assessment is 1963-64, the corresponding accounting period being that which ended on march 31, 1963. the assessee, an individual, sold his residential house on july 25, 1960. he purchased a new house for rs. 19,550. the capital gain in relation to those transactions computed in accordance with the provisions of the indian income-tax act, 1922, was a sum of rs. 15,029. no tax on the capital gains was, however imposed on the assessee under that act in view of the provision in sub-section (4)(b)(ii) of section 12b of that act. the assessee made considerable improvements to the new house that he purchased but did not.....

Judgment:

Govindan Nair, J.

1. This is a reference at the instance of the assessee under Section 256(1) of the Income-tax Act, 1961. The questions referred are these :

'(i) Whether, on the facts and in the circumstances of the case, the Income-tax Officer had jurisdiction to invoke the provisions of Section 154 of the Income-tax Act, 1961, and to revise the assessment originally made ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of Section 54(ii) are attracted to the sale effected by the assessee on July 1, 1962 ?

(iii) Whether the computation of capital gains assessable to tax is in accordance with law '

2. The year of assessment is 1963-64, the corresponding accounting period being that which ended on March 31, 1963. The assessee, an individual, sold his residential house on July 25, 1960. He purchased a new house for Rs. 19,550. The capital gain in relation to those transactions computed in accordance with the provisions of the Indian Income-tax Act, 1922, was a sum of Rs. 15,029. No tax on the capital gains was, however imposed on the assessee under that Act in view of the provision in Sub-section (4)(b)(ii) of Section 12B of that Act. The assessee made considerable improvements to the new house that he purchased but did not keep it for long as he sold that house too on July 1, 1962, for a consideration of Rs. 56,500. For the assessment year 1963-64 this sale was taken into account for determination of the capital gains. The capital gains then was determined at Rs. 7,500 by applying Section 45 of the Income-tax Act, 1961, by the assessment order dated March 25, 1964. The Income-tax Officer, according to him, discerned an apparent mistake on the record of this assessment and, therefore, issued a notice tinder Section 154 of the Income-tax Act, 1961, to the assessee to show cause why the original assessment should not be rectified by including the sum of Rs. 15,029, the capital gains by the sale of the first house on July 25, 1969. This was proposed on the basis of Section 54(ii) of the Income-tax Act, 1961. Though the assessee demurred, the proposed rectification was made. An appeal taken by the assessee before the Appellate Assistant Commissioner was dismissed and the Tribunal in further appeal came to the same conclusion, holding that Section 54(ii) applied and that, therefore, the sum of Rs. 15,029 must be added to the capital gains.

3. Counsel for the assessee contended that it is not at all clear that Section 54(ii) of the Income-tax Act, 1961, warranted the inclusion of the sum of Rs. 15,029 to the difference between the purchase and sale price of the house that had been acquired by the assessee after the first sale and which had been considerably improved by him. According to the counsel for the assessee, Section 54(ii) of the Income-tax Act, 1961, will be applicable only when the first sale also had resulted in capital gains which could be assessed under the 1961 Act. He invited our attention to Section 45 and also to Section 54. The relevant part of Section 45(1) of the Income-tax Act, 1961, enacts that 'any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54 and 54B be chargeable to income-tax under the head ' Capital gains ' and shall be deemed to be the income of the previous year in which the transfer took place.'

4. Counsel for the assessee contended that capital gains mentioned in Section 45(1) can therefore only arise for the purpose of the 1961 Act with reference to some sale transaction that took place in the earliest of the previous years relating to which an assessment could be made under the Income-tax Act, 1961, or in any years subsequent thereto. He submitted that since the first sale of the residential house then owned by the assessee was on July 25, 1960, the profits or gains made by that sale could not have given rise to any capital gains under the Income-tax Act, 1961. Section 53 referred to in Section 45(1) of the said Act is not relevant for the purpose of our case. Counsel for the assessee contended that the very wording of Section 54 will indicate that the 'new asset' mentioned in Section 54(ii) can only be an asset acquired after the sale as envisaged by the first paragraph of Section 54. That sale it is urged must necessarily be during an accounting period to which the Act applied. We shall read Section 54 :

' 54. Profit on sale of property used for residence.--Where a capital gain arises from the transfer of a capital asset to which the provisions of Section 53 are not applicable, being buildings or lands appurtenant thereto the income of which is chargeable under the head ' Income from house property', which in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed, a house property for the purposes of his own residence, then, instead of the capital gains being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,--

(i) if the amount of the capital gain is greater than the cost of the new asset, the difference between the amount of the capital gain and the cost of the new asset shall be charged under Section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under Section 45; and for the purpose of computing in respect of the new asset any capital again arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.'

5. The words ' new asset' occurring in Section 54(i) as well as in Section 54(ii), in the latter in more than one place, must refer to the asset which is indicated in Section 54, paragraph 1. This can only be an asset that had been acquired within a period of one year before or after the date of sale or constructed within two years thereof. The sale must it is urged refer to a sale during a previous year to which the Income-tax Act, 1961, will apply. If this is the view to be taken the expression ' new asset ' occurring in Section 54(ii) cannot be applied to the property sold on July 1, 1962. That was a house acquired in a previous year to which the Income-tax Act, 1961, did not apply and cannot be treated as a 'new asset ' for the purpose of Section 54. We do not consider it necessary to express a final opinion about the ambit and scope of Section 54, particularly Section 54(ii), but we feel no doubt that the question is a debatable one and that in those circumstances, the Income-tax Officer had no jurisdiction to invoke Section 154 of the Income-tax Act, 1961. Reference may be made to a recent decision of the Supreme Court in T.S. Balaram, Income-tax Officer, Company Circle IV, Bombay v. Volkart Brothers, [1971] 82 I.T.R. 50, 53 (S.C.). Their Lordships observed in that case as follows:

' A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions.'

6. We are of the view that two opinions on the question are certainly possible. Section 154 could not therefore have been invoked. We answer the question No. (i) referred to us in the negative, that is, in favour of the assessee and against the department. In view of the above answer, we do not consider it necessary to answer question No. (ii) as an answer to that question will be purely academic. The question No. (iii) also does not arise as the computation of the capital gains by the order dated March 25, 1964, must stand in view of the answer to question No. (i). We decline to answer this question as well. We make no order as to costs.

7. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by Sub-section (1) of Section 260 of the Income-tax Act, 1961.